China faces risks from inflation and a possible boom and bust in real estate prices and should allow its tightly controlled currency to rise to promote economic stability, said the International Monetary Fund.

“A stronger renminbi would increase household income, boost consumption, make China’s manufacturing products more affordable for the Chinese people, and help build a stronger service economy,” economist Nigel Chalk, the IMF’s mission chief for China, said in a statement.

That statement comes as United States officials have long urged China to allow its currency the renminbi — or yuan — to appreciate more rapidly. Between 2008 and 2010, China had pegged the yuan to the dollar, keeping its value artificially low.

U.S. officials claim that China continues to manipulate the yuan, giving Chinese exporters an unfair advantage that has created global trade imbalances.

Over the past year, the currency has appreciated 5.5% against the weakening U.S. dollar. Once economists take China’s rapid inflation into account though, the yuan has actually depreciated, the IMF said.

A stronger yuan that floats more freely against international currencies could help China lessen imbalances in its economy, including high inflation, the report said.

Rapidly rising food prices, a possible real estate bubble and a decline in credit quality are all potential risks that could impede China’s rapid growth, it said.

Nevertheless, the IMF expects China’s gross domestic product to grow 9.6% this year and 9.5% in 2012.

In contrast, growth in the U.S. is forecast to pick up only 2.5% in 2011 and 2.8% in 2012.

Chinese authorities disagreed with the IMF’s currency recommendations, the report said.